The Delaware Court of Chancery recently ruled in favour of US mobile operator Sprint and its Japanese owner Softbank (TYO:9984) in litigation stemming from the former's merger with local wireless broadband player Clearwire.

In July 2013, Sprint acquired the 49.8% of Clearwire’s equity that it did not already own for a price of US$5 per share. At the same time, Softbank acquired majority control of Sprint.

Sprint and Clearwire had previously entered into a merger agreement in December 2012 with a set acquisition price of US$2.97 per share; however, thereafter Clearwire received a higher offer from a competing bidder and, after additional negotiations, a revised merger agreement set the final price at US$5. That deal was approved by a vote of approximately 70% of the non-Sprint stockholders.

Petitioners, which were Clearwire stockholders that had dissented from the merger on the grounds of an allegedly inadequate price, asserted that Sprint allegedly aided and abetted by Softbank, breached its fiduciary duties as a controlling stockholder during the negotiation process, and sought an appraisal of the fair value of their shares.

The court ultimately found that Sprint proved there was no breach of fiduciary duty and that the fair value of Clearwire’s common stock at the time of the merger was US$2.13 per share.

The court, assuming Sprint was a controlling stockholder, applied the “entire fairness” standard of review. Even though it acknowledged instances of alleged unfair dealing in the process before the initial merger agreement, it found that the revised merger agreement was entirely fair.

In addition to emphasising the approval by non-Sprint stockholders, the court highlighted that there was “overwhelming evidence that the final deal price of US$5 per share was fair to Clearwire and its minority stockholders”.

It concluded that the Delaware appraisal provision required the court to determine the “fair value” of Clearwire shares as of the date of the merger, independent of any claimed synergies.

The court relied on a DCF analysis. In comparing the parties’ expert DCF analyses, it found that the primary disagreement stemmed from the projections chosen.

In adopting the defendant expert’s DCF valuation, the court pointed to the fact that the projections were prepared in the ordinary course of business and not for an independent purpose.

This decision is notable for appraising the fair value far below the deal price, when Delaware courts have tended to award the deal price or higher when controlling shareholders are involved.

Alan Goudiss is a Partner at Shearman & Sterling. He is in the firm's Litigation Group and a Member of the Sports Group. His practice includes a wide range of commercial, securities, corporate governance, and M&A litigation and advice.